There is a shortage of affordable budget hotels in Central and Eastern Europe.

Five to ten years ago, there was one pre-dominant budget hotel group in Europe (Accor), hardly any financing available for budget hotels and a lot of investors who snubbed their nose at the thought of developing a budget hotel.

Investors and developers were focusing on luxury or at least upscale hotels. This held particularly true in Eastern Europe, where oligarchs discov-ered, after getting bored with yachts, villas and English soccer clubs, a new toy: luxury hotels. It became de rigueur to own at least one palace-style hotel, and of course, costs did not matter.

Now, as a result of the worldwide economic crisis, trophy hotel owners dis-covered the importance of cash-flows. Luxury hotels became more of a liabil-ity than a smart investment. This rude awakening led to a re-evaluation of the merits and dangers of the hotel business. At the same time, budget and mid-segment hotels showed a remarkable resilience in light of the economic crisis. In fact, some of the few existing budget hotels in CEE benefited from restricted travel budgets of business executives and tourists alike.

Given the large populations of many East European countries, the still rela-tively low income levels and the somewhat insufficient traffic infrastructure, there is a clear case for budget hotels in this part of the world. However, there are still very few modern, affordable hotels in CEE (with the possible exception of Poland). The reasons for this comparative lack of supply are obvious:

a high barrier of entry

non-transparent local ownership structures and building regulations

a lack of road infrastructure

a limited acceptance of budget products among wealthy business travel-lers (both local and international)

In addition, skyrocketing land prices made budget hotels look less appealing than in more mature (and affordable) markets.

Besides the crisis, two major changes might now lead to a quick growth of budget hotel supply: more realistic land prices and the acceptance of the budget hotel model among local decision makers.

There is, however, one considerable obstacle for budget hotel development: stand-alone budget hotels generally do not make sense from an economic point of view since they lack economies of scale. Therefore, investors and hotel groups generally try to focus on comprehensive roll-out strategies for a whole country or region. In some countries, this is not a valid option because of the relatively limited size and number of population centres in the country (e.g. Slovenia, Moldavia). So it is no surprise that the first major focus of most hotel groups and investors was Poland (followed by Romania), as this country has a large population, a certain number of major population centres and a relatively stable investment climate.

One key question, which is repeatedly asked regarding budget hotels in CEE, is whether hotels there would differ in any major way from their equivalents in West Europe. The answer is straightforward: no ¡V budget hotels in Eastern Europe are